By Dipen Sabharwal, Partner in the International Arbitration Practice at global law firm White & Case
We have, according to Bank of England governor Mark Carney, entered an “era of hyperglobalisation”. The total value of international trade has grown nine fold in the last three decades. Supply chains of companies cut across borders and extend to multiple geographies. Shareholders, investors, creditors, suppliers, customers and employees often span numerous countries. This ‘hyperglobalised’ era with its multinational and multicultural environment is fertile ground for business opportunities but also disputes. Cross-border disputes have become more frequent. However, rather than seeking redress through national courts, companies are increasingly agreeing in their contracts that any disputes will be resolved by international arbitration. This is confirmed in a recent survey on ‘Improvements and Innovations in International Arbitration’ conducted by the School of International Arbitration, Queen Mary University of London, in partnership with White & Case, which reveals that international arbitration is the preferred dispute resolution mechanism of choice for 90% of respondents. But why has arbitration become the preferred method of dispute resolution on the international stage and what are the key things to know about it?
What is arbitration and what benefits does it offer?
Arbitration is a private form of dispute resolution. Parties to a contract can elect that any dispute arising under or in relation to that contract will be settled by arbitration, administered either by a provider of arbitration services or by the parties themselves, rather than by litigation in national courts. There are a number of reasons why they might do this; reasons that are particularly pertinent in the context of international business.
International business transactions, by their nature, involve multiple jurisdictions. In a supply of goods or services situation, the party providing the goods or services will likely be based in a different jurisdiction from the purchasing party. Where both jurisdictions are developed economies, this may cause little difficulty. However, where the provider is based in an emerging market, the purchaser may find itself exposed to a number of business risks, such as potential political instability or a perceived lack of efficiency or impartiality in the national court system.
International arbitration mitigates this risk by allowing the parties to select the jurisdiction in which disputes are to be resolved. The place or ‘seat’ of arbitration can be anywhere in the world, irrespective of whether it has any connection to the parties or to the subject matter of the contract. A neutral jurisdiction can be selected, thereby avoiding any perceived ‘home advantage’. 64% of respondents to the Survey cited the ability to avoid specific legal systems and national courts as one of the most valuable characteristics of international arbitration.
Unlike litigation, parties to arbitrations are able to exercise some control over the identities of the individuals who will decide their dispute, which is usually a panel of three arbitrators or a sole arbitrator. The ability to select the decision-makers who will determine a dispute was cited in the Survey as a very valuable characteristic of arbitration.
A common mechanism is for the parties to agree to each choose one arbitrator and those two individuals to then agree between them the identity of the third, presiding arbitrator. This means that parties can select individuals with expertise in the relevant industry, a feature that is particularly attractive where the subject matter is highly technical, such as specialised construction projects or the technology sector. In contrast, whilst a judge may have years of legal experience, he or she may not have any prior or specialist knowledge of the subject matter of the dispute
Although not always the case, litigation is generally conducted in public; hearings are open affairs that members of the public (and press) can attend and documents filed at court are often readily available. There is, then, a risk that commercially sensitive information will become public during the course of a dispute. Also, the very fact of the existence of the dispute will be public, which can cause reputational damage to the parties or to a project. Arbitrations, however, are characteristically conducted in private and, because the proceedings can be adapted to suit the requirements of the parties, can be (and almost always are) confidential. The Survey reveals that in-house counsel are particularly motivated to choose arbitration due to the confidentiality and privacy that arbitration typically affords.
Even if a party to litigation obtains a judgment in its favour, there is a risk that the losing party will not comply with it. The successful party must then commence enforcement proceedings in the relevant courts (usually in the jurisdiction in which the losing party has assets, which can mean having to bring actions in multiple jurisdictions). Such actions are not always successful because there is no universal regime for the recognition and enforcement of judgments.
International arbitral awards are more readily enforceable due to the existence of a widely-adopted international legal instrument, the New York Convention, to which 156 countries worldwide have signed up. The New York Convention mandates that states which are party to it must recognise and enforce foreign arbitral awards unless the losing party can establish one of a few narrow exceptions.
Demonstrating the importance of enforceability, some 65% of respondents to the survey chose this as the most valuable characteristic of arbitration.
International arbitration, rather than litigation, is now overwhelmingly perceived to be most effective method to resolve cross-border disputes. In this era of hyperglobalisation, companies would do well to look beyond the traditional option of rushing to court and consider arbitration instead.